Help dealing with mortgage debts

If you’ve been struggling to keep up your mortgage payments, you may have started to build up a debt. This is often called mortgage arrears. 

You might be in debt because you missed one or more monthly payments or you’re paying less money each month than your monthly payment.

You’ll need to work out a way to pay back what you owe. If the debt continues to build up, your lender will take you to court and you might end up losing your home.

Pay your mortgage arrears before other debts

Mortgage arrears are a ‘priority debt’ - this means you need to pay them before other debts like credit cards. If you have more than one debt, you can work out which debts to pay first.

Your mortgage lender will contact you if you owe them money - make sure you don’t ignore them. Explain your situation and tell them you’re trying to work out how to pay back the money you owe. They might give you more time to pay off the debt.

If you decide to change your mortgage to pay off your debt, you should make sure you understand how any change in your mortgage could affect you. You can get independent financial advice to help you make a decision.

When you’ve decided how you’re going to repay your debt, your mortgage lender needs to agree to the terms.

Speak to an experienced debt adviser immediately if you:

• don't have any options for paying off your debt

• can't reach an agreement with your mortgage lender

• have had a letter from your mortgage lender threatening court action

There are things you might be able to do to help to pay off some or all of your debt.

Looking at your budget

If you've fallen behind with your mortgage payments, you’ll need to take a good look at your household budget.

You'll need to make a list of all the money you've got coming in and going out of your household. This should include any other debts you owe. Make sure that the amounts you put down are realistic.

You can use an online budgeting tool to help you do this.

Think seriously about whether it's possible to increase the money you've got coming in or make cutbacks on your spending.

There are things you can do to try and increase your income - for example you might be able to claim benefits or get help with paying your energy costs.

You can check how to increase your income.

You can check what benefits you can get.

For more help with budgeting and increasing your income chat to a debt adviser.

Making changes to your mortgage

You might be able to clear or reduce your mortgage debt by changing your mortgage arrangement. Any changes need to be agreed by your mortgage lender.

You might be able to:

• add the debt to your mortgage

• extend the time left on your mortgage

• change to an interest-only mortgage

• agree a payment break

• make extra mortgage payments

Only some of these options might be open to you, it depends on your circumstances.

Before you agree to make any changes to your mortgage, ask your lender if there will be a charge for this, and how much it will be. For example, your lender could charge a fee for:

• ending your fixed term mortgage before the agreed date - this is known as a ‘redemption fee’ 

• changing the terms of your mortgage - this is known as an ‘administration charge’

If the charges seem very high, speak to an adviser.

Add the debt to your mortgage

You can add the money you owe to the amount you originally borrowed - you’ll pay it back over the remaining period of the mortgage. This is called capitalising the arrears.

Your monthly repayment will be higher because you’ll have more money to pay back in the same amount of time.

Your mortgage lender will check to make sure you can afford a higher monthly payment.

If your lender agrees to add the debt to your mortgage, you’ll no longer be in mortgage arrears.

Extend the time left on your mortgage

You can lower your monthly payments by spreading your payments out for longer.

You can use the money you save from the lower monthly repayments to pay off your debt.

You’ll have to pay added interest so you’ll pay back more over a longer period.

Change to an interest-only mortgage

Your lender can agree to let you only pay the interest on the amount you owe for a short amount of time. This will make your monthly repayments much lower so you can use the money you save to pay off the debt.

When you’re only paying off the interest you won’t be making any payments to the total amount you owe.

When the interest-only period ends you’ll need to pay the full monthly mortgage repayments. If you can’t, your lender might start the process of repossessing your home.

Agree a payment break

Your lender can agree to stop or reduce your monthly payments for a short amount of time.

When the payment break ends you need to pay the full monthly mortgage repayments. Your repayment amount might be higher as any interest and missed payments from the break will be added to the total amount you owe.

Make extra mortgage payments

If you’ve got some money to spare each month, you might be able to pay back what you owe by making extra mortgage payments.

Work out your budget to find out if you have any spare money. If you do, make sure you can afford the extra amount.

A lender is unlikely to agree to a repayment plan that takes longer than the time left on the mortgage.

If your mortgage lender wants to repossess your home

You can get help from the government or your local council.

Get help from the government

You might be able to apply to the government’s ‘Help to Stay’ scheme.

If you use the scheme, you can get a shared equity loan to help with your monthly mortgage payments. This means the amount of money you’ll get is linked to the value of your home. If the value of your home goes up, you’ll need to pay more money back.

To be eligible, all of the following must apply:

• you can’t, or won’t be able to, pay your mortgage and are at risk of losing your home

• you only have one mortgage on your home

• your home is in Wales and worth up to £300,000

• your household income is less than £67,000

• you’ve already had free debt advice

If your application is accepted, you’ll get help from a mortgage adviser to decide if the scheme is right for you.

Find out more about the 'Help to Stay' scheme on the GOV.WALES website.

Get help from your local council

You might also be able to get help from your local council through a mortgage rescue scheme.

If your local council offers the scheme, they'll run it with a local housing association. Using a mortgage rescue scheme should give you more security than selling and renting your home through a private company

If you use a mortgage rescue scheme you might be able to:

• get a shared equity loan to help pay off what you owe - you’ll need to pay this back, but you won’t need to pay interest

• sell your property to the housing association and rent it back

Your local council can help explain more about the scheme. 

The local council will decide if you're eligible for the scheme by looking at your situation. For example, they'll think about whether:

• you’ll be homeless if your property is repossessed

• you own any other properties

• you live in specially adapted housing because someone in your household is disabled

• you’re able to sell the property and buy a cheaper home locally

You should check if your local council offers a mortgage rescue scheme and how you should apply. You can find your local council on the Welsh government website.

If you need help applying to the scheme, talk to an adviser.

Take out a loan against the value of your home

There are two main types of loans you can take out against the value of your home. How much you can get will depend on the amount of equity you have in your home.

Equity is the value of your home minus the amount you owe, it’s usually talked about as a percentage.

Before you take out a loan you should get financial advice from a specialist mortgage adviser, check how to find independent financial advice.

Getting a second mortgage

You can get a secured loan or ‘second mortgage’ on your home which you’ll pay back by monthly repayments. These are on top of your existing mortgage repayments.

Your lender will check to make sure you can afford the repayments before accepting the second mortgage. If you miss payments and fall into arrears, your home could be repossessed.

Getting equity release

You can take out some of the money in your home as a loan, this is known as equity release. You should check the terms and conditions, for example some schemes have a minimum age of 55.

The loan will be repaid by the sale of your home when you move into long-term care or die.

You need to pay the interest on the amount you take out. Depending on your contract you might be able to either:

• pay the interest in monthly payments

• repay it all at the same time as the loan, with the sale of the house

Giving up your endowment policy

If you have an endowment mortgage, you can cash in all or part of your policy or sell it off to an investor. This will provide you with a lump sum of money which you can use to pay off your debt.

If you give up your endowment policy, you'll need to find another way to pay off your mortgage loan and find alternative life insurance cover.

Check the terms and conditions of your policy to find out if there are any costs for ending your endowment policy. You might find it helpful to talk through your options first, check how to find an independent financial adviser.

Borrowing money

You can take out a loan, or borrow money from someone you trust to help pay off your mortgage debt.

Important

Don’t borrow money from loan sharks

A money lender has to be authorised by the Financial Conduct Authority (FCA) to lend money legally. Money lenders who aren’t authorised by the FCA are breaking the law, they’re known as loan sharks. Check what to look out for if you’re worried a money lender is a loan shark.

If you take out a loan you’ll need to look closely at the terms and conditions. They often have high interest rates and it might end up costing you a lot more.

Loans to repay mortgage debt are often secured on the home. This means if you can’t make the repayments, your home could be repossessed.

Chat to a debt adviser if you're thinking about borrowing money. They will talk through different options to help manage your mortgage arrears.

Take money from a personal pension if you're over 55

If you have a defined contribution pension, you can take out some money to help pay off your mortgage debts. Defined contribution pensions are pension pots which that are built up over time through regular payments.

Before taking out some or all of your money you should think about:

• any costs you might have later in life, for example care costs

• if you'll have to pay tax on some of the money

• the impact of any benefits you're receiving

You should speak to a financial adviser before taking money out of your pension pot to pay off mortgage debt. Check how to find an independent financial adviser. 

Claim on an insurance policy

You might have taken out a mortgage payment protection insurance (MPPI) policy when you got your mortgage, or afterwards.

Claim on your MPPI policy to cover your mortgage payments if you can't work because of unemployment or sickness. Check your paperwork or with your lender if you're unsure if you have MPPI.

There are lots of circumstances where, even if you have a payment protection policy, it won't pay out. You’ll need to check the terms and conditions of your policy carefully to see if you’re covered.

If your insurer denies your claim you should complain through their complaints process.

If you aren’t happy with their reply you might be able to complain to the ombudsman. Your insurer should have a very good reason for not paying out on the policy. Check how to complain to the Financial Ombudsman Service on their website.

Tell your mortgage lender your plan

Once you’ve worked out how you’re going to pay back your debt you should contact your mortgage lender.

If you’re making a change to your mortgage to pay off your debt, your mortgage lender has to agree to the change.

If you’re cashing in an endowment policy or claiming on insurance you should still let your lender know as soon as possible.

Your lender’s contact details will be on your most recent mortgage statement or you can find them on your website.

If your mortgage is with a high street bank or building society, you could also speak to the mortgage adviser in your local branch.

You should clearly explain to your mortgage lender how you intend to pay back what you owe. You might find this easier to do in writing. 

You should include:

• the reasons why the mortgage payments debt has built up

• your previous payment record, if this was good

• how you plan to pay off the debt

• if relevant, how many years it will take to clear the debt, compared to the remaining term of the mortgage

• how much equity is in your home, this is the difference between how much your home is worth and how much you owe

Your mortgage lender will respond and let you know if they agree with how you’re going to pay back the money you owe.

If you let your mortgage lender know your repayment plan over the phone, they should quickly let you know if they accept the terms.

If your lender doesn't agree to your plan

It’s important to keep making regular payments, even if they’re small amounts.

This might help your case if your lender takes you to court at a later date, as it shows you continued to pay off your debt.

You might be able to complain to the ombudsman if your lender won’t agree to your plan for paying back the money you owe.

Your lender should give you a good reason for not agreeing. Check how to complain to the Financial Ombudsman Service on their website.

Your lender also has to follow rules to make sure you’re treated fairly. If they don’t follow the rules, you can complain. Check if your lender has followed the rules and how you can complain.